Physicians Need a Financial Check-Up

Even with stronger earnings and savings rates than
the general working population, an analysis from Fidelity Investments shows
many physicians face the prospect of steeply reduced income in retirement.

While physicians rank among the most highly compensated
professionals, with an average annual salary of $299,000, many are not on track
to support a financially secure lifestyle in retirement, according to a new
report from Fidelity Investments. The report analyzes the retirement
savings behaviors of some 5,100 physicians and 95,500 other health care
professionals using proprietary Fidelity data, and finds the retirement outlook
for doctors is surprisingly bleak in terms of traditional readiness measures,
especially income replacement ratios.

The findings challenge the assumption that because
physicians earn high average salaries, they should be financially prepared to
retire in comfort. In reality, based on Fidelity’s analysis, physicians are on
track to replace only 56% of their income in retirement, considerably lower
than the income replacement rate of 71% Fidelity suggests for those earning
more than $120,000 annually. The lower percentage, Fidelity explains, could
force significant lifestyle changes for doctors late in life.

Fidelity researchers say the 15% income replacement
shortfall is attributable to a number of factors limiting physicians’ ability
to save more for retirement, such as a shorter savings horizon, since doctors
often don’t begin careers until their 30s. And many physicians carry
substantial student loan debt from undergraduate and medical school, which
interferes with early-career savings efforts, when dollars have the most time
to grow before retirement.

When it comes to investing behaviors, the report finds
younger physicians are demonstrating age-appropriate asset allocations in
defined contribution (DC) retirement plans, while their older peers appear to
be investing too aggressively and leaving critical savings exposed to market
volatility.

The report does reveal some good news for doctors.
Physicians’ average total savings rate, from both employer and employee
contributions, is quite healthy, at 14.9% of annual salary. Not surprisingly,
older physicians are saving more than their younger peers, with those age 60 to
64 saving 16.3% on average, compared to younger physicians, age 30 to 39, who
are saving 13.1%.

Fidelity points out that, because of their high salaries,
physicians are likely to receive lower Social Security benefits than other
segments of the U.S. labor force, suggesting they should consider saving more
than those who earn less.

Rick Mitchell, an executive vice president for tax-exempt
retirement services, says Fidelity’s latest analysis reveals that physicians
are not as financially prepared for retirement as one might think. He says the
results are a clear indication that physicians need more financial guidance.

The analysis suggests physicians and other employees with
higher salaries generally need to save at an even higher rate than other
workers—15% or more in most cases—as Social Security benefits cover less of
their income needs in retirement. In fact, according to the Fidelity report,
Social Security benefits for physicians ages 60 to 67 are projected to account
for a much smaller portion of retirement income (12%) than non-physician health
care professionals covered in the analysis who are in the same age range and
average $60,000 in annual salary (30%).

Fidelity says this means physicians need to consider ways to
save more. To start, physicians should save up to the IRS limits, which allow
employees to contribute up to $17,500 for those younger than 50 years old and
$23,000 for those over 50 in their qualified workplace retirement plans.
Surprisingly, Fidelity says many physicians are not maximizing this savings
opportunity, with 60% of physicians under 50 years old and 30% of those age 50
and older not saving up to these limits last year.

And
even for physicians saving up to the IRS cap, savings challenges remain given
their salary levels, as these physicians cannot contribute 15% or more of their
annual salaries without reaching the limit. To address this, Fidelity says plan
sponsors and advisers should consider offering alternative saving plans, such
as a non-qualified 457(b) plan, to help physicians increase retirement savings.

Best Practices to Help Improve Physicians' Retirement
Readiness

To assist in improving retirement readiness, the report
offers a list of best practices for sponsors and advisers working with
physician participants to consider. Fidelity says physicians can improve their
retirement outlook by doing the following:

Save up to the 402(g) limit of $17,500 (and
$23,000 for those 50+) in 2014 in qualified retirement savings plans, and
maximize Health Savings Accounts (HSAs) if the plan offers them;

Take advantage of other savings vehicles, such
as non-qualified DC savings plans, IRAs, tax-deferred annuities and brokerage
accounts;

Target a total retirement savings rate of 15% or
more annually; and

Seek professional guidance to develop savings
rates goals, ensure asset allocation is age-appropriate and create a retirement
income plan.

Best practices for employers to help physicians in the
workplace include the following:

Use plan analytics to assess the retirement
readiness of both physician and non-physician populations, and adjust the
retirement program design accordingly;

Provide additional retirement savings
opportunities for physicians, such as a non-qualified 457(b) plan, which are
widely used in the nonprofit health care sector; and

Fidelity also urges employers to define key metrics to
measure progress, including percentage of physicians with total savings rate of
15% or more, percentage of physicians with age-based asset allocation, and
income replacement rates for physicians and non-physicians.